Australia's CBA disappoints as costs rise, delays payout

* Cash profit A$8.49 bln vs A$8.73 bln analyst forecast
* Disappointing that capital and cost management delayed -
CS
* Most of future capital surplus to be returned to investors
- CEO
* Recent interest rate cuts to take 4 bps off NIM in FY2020
- CBA
(Adds CEO comments at analyst briefing, details on outlook,
impairments)
By Paulina Duran
SYDNEY, Aug 7 (Reuters) - Commonwealth Bank of Australia
dashed investor hopes for capital handouts and posted
its second consecutive annual profit fall on Wednesday, missing
expectations as rising costs and falling rates ate into margins.
CBA's first back-to-back profit decline in more than a
decade shows Australia's banks are struggling to grow earnings
in an environment with intense regulatory scrutiny and subdued
economic and credit growth.
They are also struggling to meet investors' expectations on
yield in the face of mounting costs, including legal bills
linked to misconduct revealed by a public inquiry into
financial-sector wrongdoing last year.
"Clearly, we've seen some softening conditions," CEO Matt
Comyn told analysts at an investor briefing in Sydney. "The
reality is, in a softer income environment, we have to do more
work and we will on cost in future periods."
Australia's largest bank declared an unchanged fully-franked
final dividend of A$2.31 per share, disappointing those
investors who had anticipated a special dividend or a buyback,
according to analysts.
Comyn said it was reasonable to expect that a "good
proportion" of its A$6 billion in surplus capital would be
returned to shareholders. The bank would update investors about
its capital plans before the end of September, he said.
CBA shares fell as much as much as 2.9% in morning trading
before recovering to be 1% lower in the afternoon, while the
broader market was 0.7% higher.
Cash profit from continuing operations, a measure that
excludes non-cash accounting items and sold-off units, fell to
A$8.49 billion in the year ended June 30, missing a A$8.73
billion profit forecast from analysts polled by Reuters.
HOUSING PICKUP
While home loan and business-lending growth was up 4% for
the year, margins suffered amid strong competition and falling
rates.
Net interest margin (NIM), a key gauge of profitability that
measures the difference between interest paid on deposits and
earned on loans, fell five basis points to 2.10%.
Expenses unrelated to remediation were also higher, with the
cost to income ratio rising to 46.2% from 44.1% last year, far
from a self-imposed target of less than 40% "in the medium
term".
Overall, it was "a disappointing result given the
expectations that had been built in the market around costs and
capital management that now appear delayed," Credit Suisse
analysts told clients in a note.
Australian bank earnings are getting squeezed by the central
bank's move to cut the cash rate to a record low 1%, as it gets
harder to reduce deposit rates to offset the cheaper mortgages
they must now offer borrowers.
With an eye on its margins, the Sydney-based lender last
month resisted public pressure to pass on a central bank
interest rate cut in full.
CBA said it expected official rate cuts so far to eat about
4 basis points off its NIM in the current fiscal year, but this
would be offset by significantly lower funding costs in the bond
market.
Expected further rate cuts would intensify pressure on
margins, but they may also boost the struggling housing market.
Comyn said CBA expected a slight pickup in house prices and
credit growth.
While home loans and credit card loan arrears improved, loan
impairments grew 11% to A$1.2 billion, driven by losses from a
small number of large clients and weakness in the retail,
construction and agriculture sectors.
CBA also said it had joined U.S. rapper Snoop Dogg as an
owner in Europe's most valuable fintech startup Klarna, an
online payment company, with a $100 million investment.
($1 = 1.4795 Australian dollars)
(Reporting by Paulina Duran in Sydney, and Nikhil Kurian Nainan
and Rushil Dutta in Bengaluru; Editing by Stephen Coates)
First Published: 2019-08-07 02:24:32
Updated 2019-08-07 07:07:03

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